American Express 2009 Annual Report Download - page 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 5
LOANS
CARDMEMBER LOANS
Cardmember loans represent amounts due from lending
product customers. These loans are recorded at the time a
cardmember enters into a point-of-sale transaction with a
merchant or when a charge card customer enters into an
extended payment arrangement. Cardmember loans are
presented on the Consolidated Balance Sheets net of reserves
for cardmember losses, unamortized net card fees and include
accrued interest receivable and fees as of the balance sheet
date. The Company’s policy is to generally cease accruing for
interest receivable on a cardmember loan at the time when
the account is written off.
RESERVES FOR LOSSES – CARDMEMBER LOANS
Reserves for losses relating to cardmember loans represent
management’s best estimate of the losses inherent in the
Company’s outstanding portfolio of loans. Management’s
evaluation process requires certain estimates and judgments.
Reserves for these losses are primarily based upon models that
analyze portfolio performance and reflect management’s
judgment regarding overall reserve adequacy. The analytic
models take into account several factors, including average
losses and recoveries over an appropriate historical period.
Management considers whether to adjust the analytic models
for specific factors such as increased risk in certain portfolios,
impact of risk management initiatives on portfolio
performance and concentration of credit risk based on factors
such as tenure, industry or geographic regions. In addition,
management adjusts the reserves for losses for other external
environmental factors including leading economic and
market indicators such as the unemployment rate, GDP,
home price indices, non-farm payrolls, personal consumption
expenditures index, consumer confidence index, purchasing
manager’s index, bankruptcy filings and the legal and
regulatory environment. As part of this evaluation process,
management also considers various reserve coverage metrics,
such as reserves as a percentage of past-due amounts, reserves
as a percentage of cardmember loans and net write-off
coverage.
Cardmember loan balances are written off when
management deems amounts to be uncollectible and is
generally determined by the number of days past due (at 180
days past due). Cardmember loans in bankruptcy or owed by
deceased individuals are written off upon notification.
Recoveries are recognized on a cash basis.
Loans as of December 31 consisted of:
(Millions) 2009 2008
U.S. Card Services $23,507 $32,684
International Card Services 9,241 9,499
Global Commercial Services 24 28
Cardmember loans(a) 32,772 42,211
Less: Cardmember loans reserve for losses 3,268 2,570
Cardmember loans, net $29,504 $39,641
Other loans, net(b) $ 506 $ 1,018
(a) Cardmember loan balance is net of unamortized net card fees of
$114 million and $115 million as of December 31, 2009 and 2008,
respectively.
(b) Other loans primarily represent small business installment loans,
a store card portfolio whose billed business is not processed on
the Company’s network and small business loans associated with
the CPS acquisition. Other loans at December 31, 2008, included
a loan to an affiliate in discontinued operations.
The following table presents changes in the cardmember loans
reserve for losses for years ended December 31:
(Millions) 2009 2008 2007
Balance, January 1 $ 2,570 $ 1,831 $ 1,171
Additions:
Cardmember loans provisions(a) 4,209 4,106 2,615
Cardmember loans other(b) 57 125 146
Total provision 4,266 4,231 2,761
Deductions:
Cardmember loans net write-
offs — principal(c) (2,949) (2,643) (1,636)
Cardmember loans net write-
offs — interest and fees(c) (448) (580) (354)
Cardmember loans other(d) (171) (269) (111)
Balance, December 31 $ 3,268 $ 2,570 $ 1,831
(a) Represents loss provisions for cardmember loans consisting of
principal (resulting from authorized transactions), interest and
fee reserves components.
(b) Primarily represents adjustments to cardmember loans resulting
from unauthorized transactions. For December 31, 2008 and
2007, this amount also includes waived fees.
(c) Cardmember loans net write-offs – principal for 2009, 2008 and
2007 include recoveries of $327 million, $301 million and $295
million, respectively. Recoveries of interest and fees were de
minimis.
(d) For December 31, 2009, the amount for cardmember loans
primarily includes $160 million of reserves that were removed in
connection with securitizations during the period. The offset is in
the allocated cost of the associated retained subordinated
82